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Friday May 24, 2024
Topic A: Indian Real Estate Market
The Real State Of Affairs: A Home Back Home
Vol: 1 Num: 2    Spring 2006
The real estate market in India is booming with double digit growth. By 2008 the segment is expected to grow from $15 billion to $50 billion. The consensus today is that India is on the move and she can be ignored only at one’s own financial peril.

Traveling through an Indian city today is like passing through a war-ravaged territory. Buildings are being torn down, roads are being dug up, tracts of land are being leveled and traffic jams are everywhere as India’s burgeoning middle class races over potholes and expressways with equal ease to its destination every day. Such chaos should be intimidating. Yet, it is this visible sign of activity everywhere, which is drawing potential investors to the country.

"India has certainly firmed up in the world of business space, forcing global businesses to sit up and take a fresh view," says Anuj Puri, Managing Director of Trommell Crow Meghraj. "Interest in India has significantly increased, particularly after the government relaxed Foreign Direct Investment (FDI) norms in real estate. India is undoubtedly the flavor of the season, more so than even last year," adds Anshuman Magazine, Managing Director, South Asia, CB Richard Ellis (CBRE).

India’s economic growth is now around 7%, its external sector is strong, the foreign exchange reserves are in excess of $135 billion and the Bombay Sensitive Index (Sensex) is hovering around an all-time high of 10,000. Driving the country up such high growth trajectory are sectors such as services, media, retail, auto, auto components, IT and IT enabled Services (ITeS), which are averaging over 15% year-over-year growth. These sectors are driving consumption, including a demand for commercial and retail properties. Consequently, real estate, with an estimated market size of $15 billion, is booming at an annual growth rate of 30%. But this is not all. Experts estimate that this is only the beginning and in terms of size, the sector will top the $50 billion mark by 2008.

Understandably, predictions of such growth prospects by independent experts and global consultants have sparked investor interest at home and abroad. Global investors have already entered the Indian market as foreign direct investment (FDI) investors and as foreign institutional investors (FIIs). NRIs – who have traditionally been savers, as is reflected by their remittances, which stand at around $33 billion – have also increased their investment taking up India’s FDI to $5 billion and capital market investments to $10 billion.

If this sounds like hype, experts point out that this is just a trickle, which could soon turn into a flood. "The interest is strong and growing, but it could be more," says CBRE’s Magazine. He points out that some amount of NRI interest in Indian real estate always existed, but the most significant development now is the change in the complexion of NRI investors. "Earlier, interest was mostly from NRIs in the Middle-East, who were often buying residences for their families back home, but today, the interest is more widespread, with inquiries coming in from NRIs in the US and Europe," says he.

As far as locations go, even though metros like Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad are hot favorites with investors, the tier II cities like Pune, Jaipur and Chandigarh are also racing ahead. In general, Bangalore, Pune, Delhi and Mumbai are popular as investment destinations with companies, while smaller cities like Jaipur, Chandigarh, Nasik, Cochin, Coimbatore and Kolkata have found favor with individual investors, says Trommell, Crow Meghraj’s Puri.

The NRIs are investing either as developers or as buyers. As developers, they are investing in the development of townships, residential and commercial projects. As buyers, they are buying commercial or residential properties for a variety of reasons, including personal use, gifts or rent-income.

"The laws are slowly changing in favor of landlords and court verdicts have favored landlords and there is no hassle in leasing nowadays," explains Chennai-based V Nagarajan, Editor of Indian Real Estate, India’s only real estate magazine. Nagarajan and his Priya Publishing have also been holding regular global property shows in the US and Saudi Arabia, and the next India Property show is scheduled for May 2006 and would be held in Sunnyvale (California), Dallas (Texas) and Edison (NJ).

Undoubtedly, acquisitions for self-possession or for renting are equally attractive options as recent surveys show. According to a 10-city Express Estate-India Properties survey, average residential property prices rose by 24.2% during 2005 in Delhi, Mumbai, Kolkata, Bangalore, Chennai, Hyderabad Chandigarh, Jaipur, Goa and Pune.

The rental returns are also in a very healthy range of 8-10 percent, which is far higher than the global average of 3-4 percent. Experts warn that these are indicative figures only and the actual returns vary depending on the city and locations within a city. As Rajan Sastri, Head of Research and Advisory services, IndiaProperties.Com Pvt Ltd, says, "The yield in India seems better than in most developed nations today. Of course, that does not mean that in the years to come, the margins will drop. This is unlikely to happen especially looking at the interest rates that are on the rise."

Thus, the returns are currently attractive and if the experts are to be believed, they will continue to be high in the coming years. Furthermore the law also allows NRIs to come in as speculators, as it does not differentiate between the two categories of property buyers. Many developers, however, have moved in to check investment buying in real estate and discourage speculators.

Speculators are bad for developers, as Satish Magar, Managing Director of Magarpatta City explains, buyers in most residential complexes buy homes that they can come back and live. They look for neighbors, families and children with whom their families can interact and their children can play. Hence the focus of the developer is to build communities. When speculators move in and buy whole building blocks, they drive out genuine buyers and create "dead" cities.

Also, speculators, who enter at the initial stages, start offloading their purchases as the projects progress. Sometimes, this is at costs lower than the developers themselves. Net result is that the developer is not able to sell his property. "We don’t have a cap on the percentage of property we sell to NRIs in a project, but when a buyer wants to buy a whole apartment block, we become alert and stop it," says Magar.

While speculators are not popular, developers are working hard to woo genuine NRI investors, who may buy an apartment or two for self-occupation or for renting. As incentives developers are offering many value added services such as finding tenants for the properties being acquired by absentee landlords, including NRIs.

The 400-acre Magarpatta City, to be completed in 2008, is one such project, where the developer is wooing the NRIs who are returning home because of what Satish Magar calls the "reverse brain drain" in the IT sector as well helping find tenants for NRIs who buy an apartment or two to earn rental income.

Kumar Builders of Pune also follows a similar approach to make their projects attractive to buyers, though it does not limit allocation of property to NRIs. "It is difficult to do this (limit allocation) in cities where the demand from NRIs is high. However, many developers have a customer relationship strategy and they provide value added services," says Lalit Kumar Jain, Chairman & Managing Director of the Pune-based Kumar Builders.

Interestingly, value- added tenancy services are not provided by all builders and this is an issue that buyers need to check out prior to purchasing a property, if they need such an assistance. As Vijay Vancheswar, Vice President, Corporate Communications of the Delhi-based DLF clarifies, "DLF as a developer is involved with only promoting, setting up and developing projects across its residential, retail and commercial businesses. As of now, the company does not engage in any formal system of identifying tenants for the NRI sector."

Generally, there is no bar on the real estate segments that an NRI could invest, though there is a restriction on the acquisition of agricultural land. Another restriction is for an NRI to purchase commercial property and run a single-branded showroom, though there is no bar on buying just the property for the same purpose. "To operate his single-brand showroom business on the purchased property, the NRI will need a local partner," explains’ Sastri. Similarly, entering retail as a joint venture partner or partnering a special economic zone (SEZ) could be an out of the box idea for investment. As Kumar Builder’s Jain points out, "SEZs and retail are new buzz words."

Sale of high-end super luxury residential projects is often by invitation, though builders of unique theme communities may also follow this route. "We rarely advertise. We invite a few friends and make a one-to-one presentation and our properties get sold easily by this route," says G Nagarajan, Director of the Chennai-based Yogasri Property Pvt Ltd, which was involved in the marketing of Chamundeswari Build Tech’s Eagleton and Silver Oak projects in Bangalore. Similarly, DLF has opted for this route to sell many of its projects. "Sale-by-invitations have been performing very well. Examples include DLF’s super luxury residential projects such as Aalias’ and the Magnolia on its exclusive DLF Golf Course in Gurgaon. Prices of these high-end luxury apartments, which are in excess of $1 million have had an excellent response, comprising of NRIs and high net worth individuals in the country," says DLF’s Vancheswar.

This brings us to the million dollar question. How safe are real estate investments in India for absentee landlords? Jain of Kumar Builders warns that while buyers should have an understanding of the pricing of the project and the prevailing prices in the adjoining areas, "legal verification and dealing with established and reputed developers is the essence." Adds Sastri of, "Clear titles and perfectly legal documents is a must. Do not compromise even a bit." Magazine of CBRE suggests bringing in experts and consultants to assist in the purchase, while V Nagarajan of Indian Real Estate argues that tying up with housing finance companies could be the solution, "as these companies do the due diligence study." G Nagarajan of Yogasri Property says that in Karnataka for instance, laws require the builder to convert and register the property in the company’s name before it is offered to buyers. He also says that the developer should hold approval from the concerned government agency for the building plan. "The room for hanky-panky is much less now. Cheating does not happen so much, but still, buyers should take precautions and do due diligence," says he.

Jayanthi Iyengar is a freelance writer based in Pune, India.


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